Pub 17

Repayments 

   If you had to repay an amount that you had included in your income in an earlier
   year because at that time you thought you had an unrestricted right to it, you can
   deduct the amount repaid from your income in the year in which you repay it. 

   Type of deduction. The type of deduction you are allowed in the year of
   repayment depends on the type of income you included in the earlier year. For
   instance, if you repay an amount that you previously reported as a capital gain,
   deduct the repayment as a capital loss. 

   Repayment $3,000 or less. If the amount you repaid was $3,000 or less, deduct
   it from your income in the year you repaid it. If you reported it as wages,
   unemployment compensation, or other ordinary income, enter it on line 22 of
   Schedule A (Form 1040). If you reported it as a capital gain, deduct it on Schedule
   D (Form 1040). 

   Repayment over $3,000. If the amount you repaid was more than $3,000, you
   can take a deduction for the amount repaid or you can take a credit against your
   tax. Follow the steps below and compare the results. Use the method that results in
   less tax. 

      1.Figure your tax for 1997 claiming a deduction for the repaid amount. 
      2.Figure your tax for 1997 without deducting the repaid amount. Then: 
           a.Refigure your tax from the earlier year without including in income the
             amount you repaid in 1997. 
           b.Subtract the tax in (a) from the tax shown on your return for the
             earlier year. 
           c.Then subtract the answer in (b) from the tax for 1997 figured without
             the deduction. 

   How you treat the repayment on your 1997 return depends on which answer
   above results in less tax. 

   If the answer in Step (1) is less tax, deduct the amount repaid on the same form or
   schedule on which you previously reported it. For example, if you reported it as
   self-employment income, deduct it on Schedule C or Schedule C-EZ (Form
   1040), or if you reported it as wages, deduct it on line 27 of Schedule A (Form
   1040). 

   If the answer in Step (2) is less tax, claim a credit on line 59 of Form 1040, and
   write "I.R.C. 1341" next to line 59. 

   An example of this computation can be found in Publication 525.